Obama Unveils Proposal to Cut Corporate Tax Rate

President Obama walking with Valerie Jarrett, a senior adviser to the president, and Jacob Lew, the White House chief of staff, on Wednesday. President Obama wants to give preference to manufacturers by setting their maximum effective rate at 25 percent.Credit
Doug Mills/The New York Times

WASHINGTON — President Obama asked Congress on Wednesday to scrub the corporate tax code of dozens of loopholes and subsidies to reduce the top rate to 28 percent, from 35 percent, while giving preferences to manufacturers that would set their maximum effective rate at 25 percent.

With this framework for changes, Mr. Obama opened a new front in a running election-year debate with Republicans in Congress and in the presidential race who seek even lower taxes for businesses, as well as lower individual tax rates than Mr. Obama has embraced.

On Wednesday, Mitt Romney, whom the Obama camp has long viewed as the likeliest Republican nominee, proposed cutting by one-fifth the marginal rates paid by taxpayers at every income level, meaning that even the highest-earning individuals would pay no more than 28 percent. Mr. Romney’s plan would cut the corporate tax rate to 25 percent.

But any overhaul of the tax code, even one limited to corporate taxes, is unlikely this year, given that political backdrop and the complexity of an undertaking that would generate a lobbying frenzy as businesses vie to defend old tax breaks or win new ones.

Senator Orrin Hatch of Utah, the ranking Republican on the Finance Committee, called Mr. Obama’s proposal “profoundly disappointing in its lack of detail,” and said that tax reform must not be limited to corporate taxes alone. “This so-called framework is murky, ill-defined and contradictory to the goal of reducing complexity and making our tax code more efficient,” his statement said.

Representative Dave Camp, the chairman of the House Ways and Means Committee, agreed. “More than half of all business income is taxed at the individual rather than corporate tax rates, and a corporate-only proposal does not address the needs of those job creators, the vast majority of which are small businesses,” said Mr. Camp, a Michigan Republican.

Mr. Geithner said that while the administration’s plan was “designed so that you could do it alone,” he understood the desire among many to carry out a more comprehensive overhaul. “And that may be the way this comes out,” he said. “But we think, regardless of which path we choose, it’s worth starting the foundation-laying process now on the business income side.”

Whether on the corporate or the individual side, the same conundrum faces anyone who seeks to make the tax system both simpler and fairer while lowering tax rates, but without busting the budget: somebody must pay, and it is hard to avoid shifting the tax burden from one sector of society to another.

On the corporate side, said Roberton Williams, a senior fellow at the Tax Policy Center, different companies pay taxes at very different effective rates because the tax code has so many special breaks, loopholes, credits and allowances that some, but not all, can use. In a simpler system, “those who are most disadvantaged will benefit the most, because they have nothing to lose,” he said.

When it comes to individual income taxes, treating everyone the same can have perversely disproportionate effects.

For example, Mr. Williams said it would be hard for Mr. Romney to cut tax brackets across the board without tilting the advantage toward the richest few. Mr. Romney said today that he would limit deductions for the rich but not for the middle classes in an attempt to avoid that outcome. But his advisers were not spelling out the details, saying they would have to be negotiated with Congress in any event.

The administration plan to revamp a corporate code that is widely derided as inefficient and anticompetitive has been in the works at Treasury for two years, and is a priority of Mr. Geithner. Yet he has been preoccupied with crisis management, and is unlikely to see the project through since he plans to leave office after this year.

“The current tax code was written for a different economy in a different era,” Mr. Geithner said, citing such changes as the Internet revolution, cellphones, the rise of China and other emerging markets and a global trend to lower corporate rates. “It needs to be reformed and modernized.”

Republicans and business groups complain that the 35 percent corporate tax rate is among the highest in the world, leaving American companies at a competitive disadvantage. They typically seek a 25 percent rate, with many of them saying that the current tax breaks should be kept in place as well.

Earlier this year, Mr. Obama proposed to end tax breaks for companies that move jobs overseas and to create new breaks for those that bring jobs back.

Mr. Obama is proposing that the simplification of the corporate code should not add to the deficit, and that most or all revenue raised by closing tax breaks should be used to lower rates or offset the cost of new or existing tax breaks favoring manufacturing, clean energy, and research and development activities, according to administration officials.

For tax purposes, however, the administration would face a challenge in defining manufacturing to determine which companies would benefit from a lower rate.

While details were sketchy, an official said Mr. Obama’s tax framework would “refocus the manufacturing deduction and use the savings to reduce the effective rate on manufacturing to no more than 25 percent, while encouraging greater research and development and the production of clean energy.”

For multinational corporations, officials say the administration will oppose any shift to a territorial system of taxing offshore profits, which could exempt most of corporations’ foreign earnings from American income taxes.

Representative Camp and Senator Hatch both sharply criticized the administration’s position on this point.

Mr. Romney’s top economic adviser, Glenn Hubbard, accused the administration of a “full-throttle attack on multinationals,” and said Mr. Romney too would propose shifting to a territorial system that would not tax corporate income earned overseas.

While the United States is virtually alone in taxing multinational companies’ foreign earnings, it allows the companies to avoid taxes indefinitely by keeping profits overseas. But that encourages accounting schemes and offshore investments, critics say.